New MBL Regs May Increase Underwriting Scrutiny

If Congress allows credit unions to make more business loans, the industry can expect even more supervision from the NCUA.

The agency, already under pressure to protect the National Credit Union Insurance Share Fund from additional losses, has been coming down hard during examinations to ensure that credit unions are vigilant about anticipating all the risks before making a business loan.

“They [NCUA examiners] are pushing for our risk analyses to be even more rigorous than in the past. They are asking us do more modeling and look at more possible scenarios so we are less likely to lose money. The oversight has always been strong but they have definitely stepped it up,’’ said Marcus Schaefer, president/CEO of Truliant Federal Credit Union, a $1.1 billion institution in Winston-Salem, N.C.

The NCUA has declined to say what kind of additional regulations it would issue. If credit unions can persuade Congress to raise the cap, the agency has said it plans to strengthen its regulations.

Don Gentges, a lawyer who advises credit unions on compliance issues, said his clients are reporting that the NCUA has been especially adamant in ensuring that all loans, especially business loans, are adequately underwritten. He also noted that the agency has been more vigilant in ensuring that credit unions are working with the most accurate appraisals possible when making commercial real estate loans.

“In light of the problems that credit unions and banks faced during the financial crisis, there is an emphasis by regulators on going to back to the basics,’’ said Gentges, a partner in the law firm Whyte Hirschboeck Dudek S.C. in Milwaukee.

The NCUA is also making sure that credit unions do not exceed the limit of member business lending cap of 12.25% of assets, which Congress mandated in 1998. According to the regulator, 289 of the 2,226 credit unions that make member business loans are at or near the cap. Credit unions that are exempt from the cap include those designated as low income and those chartered to make small business loans.

According to the NCUA, as of June 30, there was $39.2 billion worth of outstanding MBLs. The average loan amount was $223,000. At credit unions making business loans, those loans represented an average of 5% of their assets.

Meanwhile, legislation is pending in both the House and Senate that that would increase the cap on member business loans from 12.25% to 27.5% of assets. In the House, a bill by Reps. Ed Royce (R-Calif.) and Carolyn McCarthy (D-N.Y.) has 62 cosponsors in the 435-member chamber. In the 100-member Senate, a companion bill by Sen. Mark Udall (D-Colo.) has 20 co-sponsors.

Both bills require that credit unions must be well-capitalized, be at or above 80% of the current cap, have five or more years of member business lending experience and be able to demonstrate sound underwriting and servicing. If a credit union’s net worth ratio falls below the well-capitalized requirement, which is currently 7%, it would have to stop making new business loans.

When endorsing the legislation at a Senate Banking Committee hearing in June, NCUA Chairman Debbie Matz said if it passed, the agency would “ensure its prudential regulatory framework is further enhanced to manage the associated risks.”

Last year, she wrote to U.S. Department of Treasury Secretary Timothy Geithner that the agency would “promptly revise our regulation to ensure that additional capacity in the credit union system would not result in unintended safety and soundness concerns.”

Gentges said the NCUA will likely want to make sure that the credit union executives in charge of business lending are trained to handle the new types of lending.

“You could see a scenario in which a credit union that can make more loans would want to do more floor-plan financing, in which they finance a store’s inventory purchases on a revolving or line-of-credit basis. That requires a different kind of risk assessment by the credit union,’’ Gentges said.

In her Senate testimony in June, Matz conceded that there have been challenges in effectively regulating MBL practices at credit unions.

She said that of the 55 credit union failures in 2009 and 2010, only one was primarily due to problems with the institution’s business loan portfolio. But she also noted that problems with MBLs were a “contributing factor’’ at credit union failures that cost the NCUSIF $83.4 million during that two-year period. The NCUSIF lost $406 million due to credit union failures in 2009 and 2010.